Banks pull back from dollar swap trade, sensing RBI disapproval (opens the source in a new tab)
- Flush with rupees after $132bn of FCNR deposits were swapped with the RBI, some large banks bought dollars spot, sold them forward and parked the money in US Treasury bills.
- A banker put the gross return near 9%: a forward premium above 4.5% plus T-bill yields around 4.4%. Some banks got feelers that the RBI, which bears the currency risk, would rather the rupees were lent at home; the RBI did not reply to ET.
- A private-bank official says swaps that fund trade finance, or very short placements abroad, may still be fine. The RBI curbed similar deals by foreign banks in 2008.
- $132bn
- FCNR deposits mobilised
- ~9%
- gross return on the trade
Why it matters The RBI absorbed the hedging cost to bring in diaspora dollars. If banks send those dollars back out for a spread, the subsidy funds an arbitrage rather than Indian credit.
Other side The forward selling also softened premiums and cut hedging costs for importers, and the high premium was partly the RBI's own doing through its sell-buy swaps. Nothing official has been said yet.